Toysmart.com: the saga continues

The United States Bankruptcy Court recently rejected a Federal Trade Commission settlement in the Toysmart.com case. As part of its stringent privacy policy, the defunct online toy retailer had promised that it would never share customer data with a third party. But the FTC deal would have allowed Toysmart to sell its Web assets, including its customer database, to an Internet company targeting families that would have agreed to the same privacy rules as Toysmart’s original policy.

On Aug. 17, however, Judge Carol Kenner declined to set conditions on the proposed sale of the customer lists until bids came in from prospective buyers. As of press time there were no buyers, and therefore no further hearings were set.

Framingham, MA-based Toysmart ceased operations on May 19, filed for chapter 11 on June 19, and then hired Boston-based consulting firm The Recovery Group to sell off its assets, including the customer database. In turn, nonprofit Web privacy organization TRUSTe in June filed a brief in bankruptcy court regarding whether Toysmart had the right to sell its consumer lists. Toysmart had signed a contract with TRUSTe, in which TRUSTe certified the company’s privacy statement and put its seal on its site.

“The agreement between Toysmart and TRUSTe is binding,” says Dave Steer, director of communications for TRUSTe, “and deviating from it can be found in breach of contract.” The FTC, however, felt that as long as the company acquiring the Toysmart names adhered to Toysmart’s privacy policy, the contract wasn’t breached.

After the July 27 bankruptcy hearing, a database auction was held, and Walt Disney Corp., a majority owner of Toysmart, tried to buy the list for $50,000 – and retire it, says Disney director of communications Michelle Bergman. But The Recovery Group rejected the offer, Steer says. (Calls to The Recovery Group were referred to Boston law firm Hanify & King, which did not return calls by press time.)

TRUSTe would accept the sale of Toysmart’s house file only if each customer were contacted and given the opportunity to decide whether he or she wished to remain in the database, Steer says. TRUSTe fears that not acting swiftly against Toysmart could set a precedent for more failed dot-coms to try to recoup money by selling their customer data.

So having spent only one year on the Web, Toysmart faces another challenge: being the unwilling poster child for online privacy violations.

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